This mandate may prove to be paradoxical at times. For one, if asset prices were to fall sharply, they may shake investor confidence and thereby impact the economy. Depending on how large the market dislocation would be, central banks having prided themselves on quantitative easing being effective in financial distress would likely deploy such policy again. However, quantitative easing has been subject to a debate of engendering financial instability. To have policy geared to using asset prices to boost the economy may not work that well the next time there is a major crisis.

Since the financial crisis, there has been a greater focus on financial stability by global central banks. The aftermath of the crisis showed how leveraged, off balance sheet and opaque financial instruments can have a profound lasting impact on global potential output. As a result, many central banks have added a "third mandate"--namely financial stability.

This mandate may prove to be paradoxical at times. For one, if asset prices were to fall sharply, they may shake investor confidence and thereby impact the economy. Depending on how large the market dislocation would be, central banks having prided themselves on quantitative easing being effective in financial distress would likely deploy such policy again. However, quantitative easing has been subject to a debate of engendering financial instability. To have policy geared to using asset prices to boost the economy may not work that well the next time there is a major crisis.

For

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DIASPYQQQBen EmonsTerming Out The Premiumhttp://seekingalpha.com/article/2112093-terming-out-the-premium?source=feed_author_ben_emons
2112093
A bond investor is primarily concerned with the yield earned on a fixed income investment. The yield to maturity fluctuates because it resembles a sum of expectations that change frequently. These expectations range from what investors see as future inflation, where they expect short-term interest rates to be and what they think is the "term premium." This is the extra return investors demand for holding a longer maturity bond. According to the expectations hypothesis the "term premium" is the same as the expected return from rolling over a series of short maturity bonds with a total maturity equal to that of a long maturity bond. The term premium has been subject to significant academic and monetary policy debate about its true value. It has been difficult to estimate what term premium is and why it changes interest rates. For investors there are several practical ways how to think about term]]>
Thu, 27 Mar 2014 06:22:23 -0400Ben Emons
By Ben Emons:

A bond investor is primarily concerned with the yield earned on a fixed income investment. The yield to maturity fluctuates because it resembles a sum of expectations that change frequently. These expectations range from what investors see as future inflation, where they expect short-term interest rates to be and what they think is the "term premium." This is the extra return investors demand for holding a longer maturity bond. According to the expectations hypothesis the "term premium" is the same as the expected return from rolling over a series of short maturity bonds with a total maturity equal to that of a long maturity bond. The term premium has been subject to significant academic and monetary policy debate about its true value. It has been difficult to estimate what term premium is and why it changes interest rates. For investors there are several practical ways how to think about term

Complete Story »]]>
Ben EmonsA Not So Neutral Ratehttp://seekingalpha.com/article/1957871-a-not-so-neutral-rate?source=feed_author_ben_emons
1957871
Monetary policy decisions are sometimes rule based. When using a basic Taylor rule equation, the NAIRU, the natural rate and the output gap determine the "neutral" policy rate. Although Taylor rule is a policy rate prescription, much of Fed policy is nowadays driven by second derivative versions of the Taylor rule like "optimal control". This model favored by Yellen, Evans, Bernanke and describes a glide path for the policy rate under different economic assumptions. For investors there is an important message. Despite a "gangbusters" real GDP of 4% in Q3 and Q4 2013, the optimal control model says Fed Funds is likely not to be hiked by late 2016, perhaps even until 2017. Under that assumption, investors have to look at another variable that has entered the monetary policy equation. This is the "term premium". It is the extra return investors demand for buying long maturity bonds instead of rolling]]>
Tue, 21 Jan 2014 15:06:23 -0500Ben Emons
By Ben Emons:

Monetary policy decisions are sometimes rule based. When using a basic Taylor rule equation, the NAIRU, the natural rate and the output gap determine the "neutral" policy rate. Although Taylor rule is a policy rate prescription, much of Fed policy is nowadays driven by second derivative versions of the Taylor rule like "optimal control". This model favored by Yellen, Evans, Bernanke and describes a glide path for the policy rate under different economic assumptions. For investors there is an important message. Despite a "gangbusters" real GDP of 4% in Q3 and Q4 2013, the optimal control model says Fed Funds is likely not to be hiked by late 2016, perhaps even until 2017. Under that assumption, investors have to look at another variable that has entered the monetary policy equation. This is the "term premium". It is the extra return investors demand for buying long maturity bonds instead of rolling

Complete Story »]]>
TBTTLTTMVTBFEDVTTTTMFZROZTLHSBNDDLBSVGLTPLWUBTGOVTTLOLBNDTENZTYBSTRSYDLBLBen EmonsThe Real Bills Doctrinehttp://seekingalpha.com/article/1957271-the-real-bills-doctrine?source=feed_author_ben_emons
1957271
In the October 2013 FOMC Minutes there was an idea proposed to establish a facility to conduct unlimited open market operations. By having a standing purchase program of short-term Treasury notes, it would be a quantitative way to influence the expected path of short-term interest rates. Fed Chairman Bernanke mentioned this mechanism in his 2002 speech. At that time he proposed an interest rate ceiling by committing to unlimited purchases of 2-year or shorter Treasuries. The Minutes expressed reluctance to deploy such a tool. However the fact that it was discussed and several participants felt it was worthwhile to study, implies there is a serious consideration among FOMC members for such a facility. A tool like that could perhaps be used in a scenario when the US falls into a higher risk of deflation.

Exchanging money for short-term notes is what has been known as the 'Real Bills doctrine'. The

In the October 2013 FOMC Minutes there was an idea proposed to establish a facility to conduct unlimited open market operations. By having a standing purchase program of short-term Treasury notes, it would be a quantitative way to influence the expected path of short-term interest rates. Fed Chairman Bernanke mentioned this mechanism in his 2002 speech. At that time he proposed an interest rate ceiling by committing to unlimited purchases of 2-year or shorter Treasuries. The Minutes expressed reluctance to deploy such a tool. However the fact that it was discussed and several participants felt it was worthwhile to study, implies there is a serious consideration among FOMC members for such a facility. A tool like that could perhaps be used in a scenario when the US falls into a higher risk of deflation.

Exchanging money for short-term notes is what has been known as the 'Real Bills doctrine'. The

Complete Story »]]>
SPYQQQSHDIASSOSDSPSQIVVSPXUUPROVOOQIDTQQQRSPDOGSQQQQLDDXDRWLEPSUDOWSDOWDDMBXUBQQEWQQQEPLWGOVTTRNDBXUCSFLAQQXTTRSYBXDBTNDQBen EmonsThe Implications Of Negative Yieldshttp://seekingalpha.com/article/1547712-the-implications-of-negative-yields?source=feed_author_ben_emons
1547712
At times investors may encounter an awkward phenomenon; a negative yield on a bond. In general yields on fixed rate or zero coupon bonds have no boundary; they could go (theoretically) infinitely negative. Negative yields are no longer uncommon however. Switzerland and Denmark's short-term government bonds yield around -25 basis points or -0.0025%. Treasury bills in Germany, the Netherlands and Austria trade in some specific cases also at a negative yield. Even recently US T-bill rates were briefly negative when Treasury yields rose sharply in June. A negative yield implies a cost to an investor. Earning a negative yield means the price paid for a bond is above par (100). That could be seen as an upfront payment. In the market for T-bills and short-term government bonds this phenomenon has been at work for a while. To take a current example; a German government bond that matures on September 13,]]>
Sun, 14 Jul 2013 08:36:18 -0400Ben Emons
By Ben Emons:

At times investors may encounter an awkward phenomenon; a negative yield on a bond. In general yields on fixed rate or zero coupon bonds have no boundary; they could go (theoretically) infinitely negative. Negative yields are no longer uncommon however. Switzerland and Denmark's short-term government bonds yield around -25 basis points or -0.0025%. Treasury bills in Germany, the Netherlands and Austria trade in some specific cases also at a negative yield. Even recently US T-bill rates were briefly negative when Treasury yields rose sharply in June. A negative yield implies a cost to an investor. Earning a negative yield means the price paid for a bond is above par (100). That could be seen as an upfront payment. In the market for T-bills and short-term government bonds this phenomenon has been at work for a while. To take a current example; a German government bond that matures on September 13,

Complete Story »]]>
Ben EmonsThe Incomplete Banking Unionhttp://seekingalpha.com/article/1533132-the-incomplete-banking-union?source=feed_author_ben_emons
1533132
On 6 June 2013, the European Commission [EC] published its proposal for the Recovery and Resolution Directive [RRD], taking a step closer towards a European banking union. It outlined, among other key points, how creditors will be ranked in case of possible future 'bail-ins.' However, the proposal does not speak to a single rule book. That means each recapitalization case will be approached in a separate, "unique" manner. To that effect, individual countries are given "flexibility" to shield specific groups of creditors in case they fear a bail-in may trigger an unintended contagion. Furthermore, countries have the option to dip into state resources to recapitalize banks. More importantly, the proposed directive's language leaves the door open for potential interpretation on how bail-in procedures will apply in future bank recapitalization cases.

While the RRD, for example, specifically states a "no creditor worse off principle," the capital structure - the rank order

On 6 June 2013, the European Commission [EC] published its proposal for the Recovery and Resolution Directive [RRD], taking a step closer towards a European banking union. It outlined, among other key points, how creditors will be ranked in case of possible future 'bail-ins.' However, the proposal does not speak to a single rule book. That means each recapitalization case will be approached in a separate, "unique" manner. To that effect, individual countries are given "flexibility" to shield specific groups of creditors in case they fear a bail-in may trigger an unintended contagion. Furthermore, countries have the option to dip into state resources to recapitalize banks. More importantly, the proposed directive's language leaves the door open for potential interpretation on how bail-in procedures will apply in future bank recapitalization cases.

While the RRD, for example, specifically states a "no creditor worse off principle," the capital structure - the rank order

Complete Story »]]>
Ben EmonsNo Longer A True Risk-Free Ratehttp://seekingalpha.com/article/1511932-no-longer-a-true-risk-free-rate?source=feed_author_ben_emons
1511932
Our financial system is built upon two premises. It is a fiat currency system that is comprised of free floating currencies backed by a paper standard, the reserve currency. The dominant factor is the US dollar at which many currencies are valued against. The other feature is financial assets valued of a benchmark, a reference rate dubbed as the "risk free rate". Whether one looks at finance such as the capital asset pricing model (CAPM) or at investment grade securities, in general a "risk free rate" is an important assumption. The financial crisis of 2008 may have changed the way the global financial system operated. For one, the direct influence on asset prices by global central banks has been unprecedented. Another reason is that it has long been assumed there was a "risk-free instrument", like a Treasury bill or a government bond. They were viewed as boring instruments with a]]>
Thu, 20 Jun 2013 06:21:21 -0400Ben Emons
By Ben Emons:

Our financial system is built upon two premises. It is a fiat currency system that is comprised of free floating currencies backed by a paper standard, the reserve currency. The dominant factor is the US dollar at which many currencies are valued against. The other feature is financial assets valued of a benchmark, a reference rate dubbed as the "risk free rate". Whether one looks at finance such as the capital asset pricing model (CAPM) or at investment grade securities, in general a "risk free rate" is an important assumption. The financial crisis of 2008 may have changed the way the global financial system operated. For one, the direct influence on asset prices by global central banks has been unprecedented. Another reason is that it has long been assumed there was a "risk-free instrument", like a Treasury bill or a government bond. They were viewed as boring instruments with a

Complete Story »]]>
Ben EmonsThe Meaning Of Voter Risk Premium For Marketshttp://seekingalpha.com/article/1325311-the-meaning-of-voter-risk-premium-for-markets?source=feed_author_ben_emons
1325311
For some time, markets were able to influence politicians. Their ability to force political decisions or call early elections reached beyond the political establishment's powers. A new influence on markets surfaced - voters - who can unexpectedly turn the course of events. They stand firmly in between markets and politicians, potentially determining the next direction. It's a new kind of risk, one that is not as easy to quantify but has become a driving force globally. Elections are a greater aspect of investment management than before because the outcomes determine political decisions related to the economy, and thereby the markets. "Voter risk" is what investors have to reckon with in a climate of complex politics, where choices to cut spending and raise taxes are becoming harder as time goes on.

To that effect, voter risk falls under the numerator of social-political rejection. In financial domino theory this is a response

For some time, markets were able to influence politicians. Their ability to force political decisions or call early elections reached beyond the political establishment's powers. A new influence on markets surfaced - voters - who can unexpectedly turn the course of events. They stand firmly in between markets and politicians, potentially determining the next direction. It's a new kind of risk, one that is not as easy to quantify but has become a driving force globally. Elections are a greater aspect of investment management than before because the outcomes determine political decisions related to the economy, and thereby the markets. "Voter risk" is what investors have to reckon with in a climate of complex politics, where choices to cut spending and raise taxes are becoming harder as time goes on.

To that effect, voter risk falls under the numerator of social-political rejection. In financial domino theory this is a response

Complete Story »]]>
Ben EmonsThe Politics Behind Debt Monetizationhttp://seekingalpha.com/article/1261091-the-politics-behind-debt-monetization?source=feed_author_ben_emons
1261091
European, American and Asian politicians are increasingly facing difficult choices for meaningful fiscal consolidation. These choices can in turn influence market movements. Important steps, however, are being delayed, causing an economic and political environment of "muddling through."

The link between politics and markets is not new. What is different now is that there are many countries where the functioning of the government is hampered by debt problems. In the eyes of the public and businesses this creates an image of constant insecurity. And because the public and private debt is so very difficult to solve, policymakers grab easier solutions like restructuring or monetizing debt. Such solutions, however, have disadvantages.

Political dysfunction

In the U.S., Europe and Japan this has led to the path of least resistance; debt monetization. This is implemented in the form of quantitative easing or what's called "financial repression," an indirect policy initiative that actually imposes on

European, American and Asian politicians are increasingly facing difficult choices for meaningful fiscal consolidation. These choices can in turn influence market movements. Important steps, however, are being delayed, causing an economic and political environment of "muddling through."

The link between politics and markets is not new. What is different now is that there are many countries where the functioning of the government is hampered by debt problems. In the eyes of the public and businesses this creates an image of constant insecurity. And because the public and private debt is so very difficult to solve, policymakers grab easier solutions like restructuring or monetizing debt. Such solutions, however, have disadvantages.

Political dysfunction

In the U.S., Europe and Japan this has led to the path of least resistance; debt monetization. This is implemented in the form of quantitative easing or what's called "financial repression," an indirect policy initiative that actually imposes on

Complete Story »]]>
Ben EmonsThe Financial Domino Effect: Positive And Negativehttp://seekingalpha.com/article/1100061-the-financial-domino-effect-positive-and-negative?source=feed_author_ben_emons
1100061
Global central bank easing has been through several distinct stages since 2009. It went from liquidity (TALF) to QE to creativity (Twist) to aggression (QE3, EURCHF peg). Fiscal policy followed along, from stimulus to austerity to 'kick the can'. Both types of policy sequences are domino type effects, and so far they have been offsetting each other. The domino theory was something from the 1950s, when there was fear communism would quickly spread in South East Asia. Today the theory has resurfaced in the Middle East spreading violence, South Africa mine strikes and Euro skeptic movements. Economies have been undergoing contraction that has fueled social protests and financial markets are reacting to both. They could be categorized as domino effects that encompass three elements: social-political, economic and financial.

These effects continue to dominate globally. The financial effect is now centered on improving monetary transmission, aimed at directly injecting stimulus into

Global central bank easing has been through several distinct stages since 2009. It went from liquidity (TALF) to QE to creativity (Twist) to aggression (QE3, EURCHF peg). Fiscal policy followed along, from stimulus to austerity to 'kick the can'. Both types of policy sequences are domino type effects, and so far they have been offsetting each other. The domino theory was something from the 1950s, when there was fear communism would quickly spread in South East Asia. Today the theory has resurfaced in the Middle East spreading violence, South Africa mine strikes and Euro skeptic movements. Economies have been undergoing contraction that has fueled social protests and financial markets are reacting to both. They could be categorized as domino effects that encompass three elements: social-political, economic and financial.

These effects continue to dominate globally. The financial effect is now centered on improving monetary transmission, aimed at directly injecting stimulus into